Dividend Stocks and Money Management

Altria, or MO was about 75% of my portfolio to start the year in 2011.  This would not be considered a normal investment strategy, but it did allow me to make 18.5 percent on my total portfolio last year.  There is a time and place for all kinds of strategies, but MO made it easy, the whole year.  I love this stock for many reasons, and I'm going to try to explain, why this stock is so amazing.

Established companies payback shareholders in a couple different ways.  The stock can go higher, that is capital appreciation.  They can pay a dividend, most likely quarterly, so that you get money while you hold the stock.  They can also buy back shares in the market, essentially removing those shares, from the share float, making every share, slightly more valuable.  The float is how many share the company has released into the wild.  Essentially, how many pieces the company has been broken up into.  

Lets say you buy 100 shares of Altria tomorrow at $28, for a total investment of $2800.  Using round numbers Altria will pay you 6% a year on your investment, or $168 per year.  Doesn't sound like much?  Well keep listening...  Altria also increases their dividend about 1-2 times a year on average.  Meaning, instead of making 6%, next year, if the stock price is still at $28, you might make 7%.  As the years go on, the dividend yield you recieve on that original investment goes higher, so you dividend return on that money can be sky high, after many years of increases.

When you also have a company that buyback shares, they lower the share count, which increases the EPS automatically.  If the EPS (earnings per share) increases, they can also increase the dividend.

Basically if company A, has 100 shares outstanding, and makes $100 a year, then the EPS is $1/per share.  If that same company decides to buyback 5 shares that same year, and they have no increase in earnings throughout the year, next year, they will make $1.05 EPS because you can now divide $1 earnings per year, by 95 shares, rather than 100.

Basically the less shares outstanding the better for all investors.  If that float, is shrinking due to a buyback, that's a good thing overall.

Altria has a "pay out ratio" of 80%, meaning they will pay out 80% of all profits in the form of a dividend.  So they buyback shares, which decreases the float, and increases the EPS, which allows them to increase the dividend, that increased dividend increases the dividend yield, which likely increases the share price.  That is the virtuous circle I was talking about.

As always, feel free to ask me anything about this, in the comments section below.

Stocks that have safe, growing dividends are very resiliant in an up or down economy.  I use this stock to anchor my portfolio, and I would recommend you do the same.  By having 50% or more of your portfolio in a safe dividend earner, you will have a much easier time beating the market.  From there you can add the risky high fliers that really make this game exciting.

The reason I like one stock for my big dividend play, is because I just need to be right one time.  If that part of my portfolio works, then I can afford to lose, and take risks in other areas.  I can focus a lot of my energy just making sure this secure part of my portfolio really is secure.  I only have to listen to one conference call a quarter, instead of five.  Watch for one set of earnings reports.  This is not the type of investment you can afford to lose on.  Your high dividend yielder, should have money to pay that dividend for years.  It should be secure, and the business should have no real way to be undercut, or go broke.

From here all we need to do, is "Keep It Simple"...

I Don't Know Everything

I hate to admit, but no, I do not know everything about the market.  In fact, I probably don't know more than 25% of the game at this point.  That percentage however, is higher than more than 99% of the population.  My basic understanding of how the market works, is a rarity.

Think about that for a second.  Isn't that kind of sad?  Many people spend a majority of their lives trying to be financially responsible.  They want to retire with a good money.  They get insurance.  They invest in real estate.  They even invest in the market, or at least someone does for them.

Photo By N. A.

They give up this right to control their destiny, because apparently it's too hard.  That must be it, or why is nobody really doing it successfully?  I say that because you never hear people talk about it socially.  If people really love something, they can't keep it quiet, yet I never hear people discuss stocks with passion (like I do, or want to).  That never happens in regular social circles, unless your in "The Biz".

The reason is you've been taught to hate the stock market.  That right, I said taught.  You probably didn't even realize it happened, but there is a distain for stocks, and investing, and it's very prevalent.    It started with the Great Depression.  People lost a lot of money, for many different reasons, and it took a lot of years before people even wanted stocks.

We had a huge crash, and huge recovery in 2008-2009.  It was what got me to pay attention to the market. I kept reading headlines, about massive losses, so I started to watch the action every single day.  This is that contrary opinion coming through huge for me.  I knew this was my opportunity to get in, and that I had to. I was very correct in doing so.  I was buying stocks at prices that would make you shake your head today, and the whole time the general consensus was the their was much more pain to go.

You have to understand that people were taking massive losses, but I watched the market closely, and bought right into fear.  There were days when the market would lose 8%.  (Buying AAPL at $82, still makes me smile.)   I've watched so many TV shows, video clips, read news articles, listened to so many smart people, tell me just how wrong I was to buy stocks here, but I knew it was right to do so.  People who started picking up stocks into the fear, out-performed extremely.

You have to understand when I recommend a stock, I'm saying I'd buy it at a certain price point.  I'm not suggesting you buy it yourself.  I want no responsibility for what you buy, or how you trade.  I'm not doing the trading.  You are the Captain of your own ship, and you steer at your own peril.  You have to understand what your buying, why it's good, and how long you might hold it for.

Most importantly, I don't know everything.  I'm still learning just like you are.  If you think I'm wrong, call me on it, but make sure you can support your case in a proper manner.  That is how learning happens.  There are different investing styles, but your style has to work, and mine does.  All I can speak to is how I've done it, how I'll continue to do it, and if and when the next bust comes, I'll be out before much damage occurs.  All because I pay attention, and I'm not too proud to cut my losses, and admit when I'm wrong.

Let me tell you about "Bulls, Bears, and Pigs"...

Why I'm Qualified

One of the worst mistakes you can make in this game, is assuming that someone's credentials, makes them good at suggesting what direction a stock will trade.  It's normal to assume, that someone with a great education, full knowledge of a certain sector, someone that converses with different CEO's, that they understand the business the best.

The problem is, then taking that knowledge, and balancing it against, where the stock is currently trading, what's it value is, what it's earnings in future will be, and what the current market sentiment is.  This is where the connection breaks down horribly.  It's not enough to understand a business inside-out, you need to know how to apply that knowledge.

You know what qualifies a great stock picker?  Simply results.  Results in this game are always money.  If a Goldman Sachs (GS) money manager with a billion dollars to invest, was able to return 12%, and that same year, you returned 15%, on your $5000 portfolio, you are the better trader that year.  If you did that consistently over a bunch of years, I would have no problem saying that you are a better trader than one of guys at Goldman Sachs.  You are, and there's no arguing this.

Results are simply gained by being intelligent, knowing what to look for, knowing what information to discredit, and having a contrary opinion.  Investing requires you to hold a contrary opinion to be profitable.  In general, who ever is selling a stock, thinks it'll probably go lower, and anyone buying it, believes it to be going higher.  It's that difference of opinion that makes the market.

Results are what I have to offer you.  My full three years of investing, I have never lost money, in fact, each of those years I returned an average of 47%.  If you could return 47% over a ten year period, they would consider you a God on Wallstreet.  Over long periods of time, like 15-20 years, 25-30% is considered godlike in this game.

Unfortunately, I can't return 47% for you each year.  Those numbers are skewed by a particularly large 2009, my first year, I grew my portfolio by 162%.  That means if I invested $100,000,  I ended up being $262000 in my first year.  Those years are not typical.  2010 I returned 4%, and returned 2011 18.5%.

These would be considered great results by anyone who knows investing.  In this last year, I returned 18.5%, and I did it against a market that was flat for the year.  Flat meaning stocks did not go up or down.  Most people made nothing, or lost,  last year.  Many big money managers did to.  My strategy was actually safe through this time.  I can honestly say, I made 18.5%, got to speculate 20% of my portfolio, on small fun stocks, and still crushed the market, and most pros.

I've started this year also, and looked poised to out-perform.

What I do for a living, how old I am, what sex I am, those are things that have merit, but really, the only that matters in this game, is results.  If I sound like I'm making it out to be a big competition, that's because it is to me, and it should be to you too.  People have to choose sides, and opinions all the time in this game, and I love that.  You do have people that are right, and wrong, and there is a clear answer.  Competition breeds results, and will make you pay better attention.

They suggest X, I suggest Y, and when Y hits exactly as I knew it would, it makes me happy.  I liken it to a checkmate in chess.  The best part is you also win money.  The better part is your are literally out smarting people with PhD's, people who are in the pits of wall street, and the talking heads on TV, at least in terms of stocks direction, which ultimately determines price, which is the only thing that matters.

Why am I qualified?  More than my results, it's my way of thinking.  I've always been against the grain.  I see both sides to every argument, without bias.  I'm willing to listen to what the other guy is saying.  I'll learn from anyone.  I argue my points with passion, and I'm never scared to make a prediction, and stand by it, right or wrong.  It's this kind of thinking, that will be the most valuable thing you take from this course.

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It's almost time to get started, but first I have to admit "I Don't Know Everything"...